Israel has the distinction of being the only country in the developed world that reduced government spending per person in the decade between 2001 and 2011, according to a report released on Thursday.
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The “Government at a Glance” report is by the Organization for Economic Cooperation and Development, the grouping of the world’s most developed countries, which Israel joined in 2010.
Israel's decline in government spending per capita was small – an average of 0.1% per year – but it is exceptional when compared to the OECD, where on average government spending per capita increased 2.2% per year.
Israel's atypical government spending is largely a product of policy – Israel's leaders actively tried to decrease the government’s share of gross domestic product. Many government leaders contended that the public sector was bloated and inefficient, with Benjamin Netanyahu famously calling the public sector the "fat man."
The process peaked in 2002 and 2003, years when the country was going through a recession that coincided with the second intifada, which was launched by the Palestinians in late September 2000. But the policy persisted even beyond the state budget crunch at the time.
The policy of reining in government was shared by all Israeli governments over the period. According to the argument, cutting government spending would free up resources that would be put to better use in the private sector. In real terms, spending rose, but on a per-capita basis it fell due to population growth, which outpaced growth in government spending.
In many respects, the argument that Israel's public sector was too large is borne out by the OECD figures. At the beginning of the last decade, the state’s share of Israel’s gross domestic product was 54%, substantially higher than the OECD average of about 40%. Israel’s leaders wanted to close that gap, and they were successful for the most part.
For most of the decade, the state budget grew by 1% a year, which did not keep pace with population growth and produced the negative per-capita figure. Israel’s population grew during the period by 1.7% per year. But fortunately, growth in economic output outpaced population growth. In 2011, the government’s share of the country’s output was 44.6%, nearly identical to the OECD average of 45.4%, OECD data show.
It might seem that the process has simply brought Israel into line with its counterparts in the developed world, but the issue is more complex than that. The country-by-country comparison includes all government expenditures, including interest payments and defense spending. But when it comes to defense costs, Israel is in a class by itself because of the many military threats, whether Hamas, Hezbollah, Syria, Iran or militants near the border in Egypt's Sinai Peninsula.
Defense costs make up 14.7% of the Israeli state budget, or more than four times the OECD average of 3.6%, according to OECD figures. Israel can thus devote a smaller share of the pie to the civilian sector. For example, despite Israel’s high poverty rate, social welfare spending here represents just 26% of the state budget compared with 36% on average among the countries in the OECD.
These figures also provide a possible explanation for the outbreak of the social justice protests during the summer of 2011, motivated in part by a sense that government services had declined. The figures also explain a shift in government policy a year before the protests started, when new guidelines were established on growth in government spending.
Since 2010, the new fiscal rules have increased government spending at least 3% annually after the government realized that the spending curbs were affecting the quality of services. The Finance Ministry is now considering decreasing the pace of spending growth, but it also might cut taxes.